junk bond

junk bond,

a bondbond,in finance, usually a formal certificate of indebtedness issued in writing by governments or business corporations in return for loans. It bears interest and promises to pay a certain sum of money to the holder after a definite period, usually 10 to 20 years......Click the link for more information. that involves greater than usual risk as an investment and pays a relatively high rate of interest, typically issued by a company lacking an established earnings history or having a questionable credit history. Junk bonds became a common means for raising business capital in the 1980s, when they were used to help finance the purchase of companies, especially by leveraged buyoutsleveraged buyout,the takeover of a company, financed by borrowed funds. Often, the target company's assets are used as security for the loans acquired to finance the purchase......Click the link for more information.; the sale of junk bonds continued to be used in the 1990s to generate capital. See also Milken, MichaelMilken, Michael Robert, 1946–, American financial executive, b. Van Nuys, Calif. Nicknamed the "junk bond king," he was an executive at Drexel Burnham Lambert, Inc., where he transformed corporate takeovers and financing by the use of high-yield junk bonds......Click the link for more information..

For example, in calculating the default rates five years after issuance of all B-rated bonds, I found the cumulative mortality on default through 1988 for this dominant junk bond category to have been 11.

While disruptions in global markets in 1998 raised risk premiums on junk bonds and bank loans and threatened a seizing-up in financial markets, ultimately they did not derail the flow of credit, especially to smaller businesses.

Instead, "[i]n the junk bond files that we have examined," wrote Professors Alan Shapiro and Mark Weinstein of the University of Southern California in a study made for San Francisco, "the only broker dealt with is Drexel Burnham Lambert"

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